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The Brookfield Transaction – Divi_end

Author: Published on: Published in: Samhallsbyggnadsbolaget STO:SBB

SBB humiliates shareholders with absurd and untrue announcements surrounding the success of its incompetent dealmakers.

December 8, 2022 – SBB announced it had sold a stake in its newly-formed EduCo to Brookfield on November 30,2022[1]. It then proceeded to defecate on a plate and present it to Ilija’s cult, who have lapped it up without question.

This report will address the many inaccuracies and objective lies in SBB’s press release surrounding the transaction and its valuation. A copy of this report has also been submitted to the financial regulator. SBB’s inadequate and inaccurate disclosures are not aligned with required transparency principles.

  • SBB claims that this disposal is between a 2.7% discount to a 2.7% premium to book, depending on earnouts. This is creative accounting.
    • The actual transaction value of the Brookfield deal is SEK 40b and comprises SEK 44.9b of SBB’s assets. This represents an 11% discount to book value.
  • As part of the transaction, SBB has provided SEK 14.5b in financing to EduCo at 3%, substantially below market rates (most recent USD private placement 2.6%-2.9% + EURIBOR). This is effectively vendor finance at below market rate to Brookfield to purchase a minority stake in its portfolio for a huge discount
    • The only party who benefits from this SEK 14.5b loan is Brookfield. It is safe to say that the discount on the transaction would have been even greater (or should be considered greater), given the uncommercial terms SBB has provided this loan to Brookfield.
  • The earnout conditions of this transaction hinge on EduCo’s ability to refinance the loan from SBB favorably, and its ability to deploy capex.
    • We don’t believe this transaction will deliver substantial earn-outs when those earn-outs are related to SBB’s ability to spend money and borrow money.
  • The Brookfield transaction will significantly impact SBB’s yield and its ability to continue paying dividends.
    • Cash earnings capacity will fall below this year’s dividend rate. We note that SBB will continue having to borrow money to maintain its dividend. We also do not believe 9%+ rent adjustments are feasible, having observed market conditions to date.
  • SBB’s LTV calculations are a clown show. We believe SBB’s LTV is closer to 66%
    • Cash is double counted. It is counted against Net Debt (numerator) and included the “balance sheet total” (denominator) lines. This both decreases the numerator, and increases the denominator, both to SBB’s favor.
    • SBB does not appear to account for Non-Controlling Interests (NCI) in its LTV calculation, massively inflating its balance sheet total.
    • SBB does not appear to account for unrealized losses stemming from this transaction. The 11% semi-realized loss on the EduCo assets is not reflected in the SBB LTV.
    • SBB excludes all hybrid securities and payables from its LTV calculation. These figures are now well established industry standards for inclusion in the LTV, with some minor caveats (see EPRA reporting guidelines).

We also note that EduCo contains several properties in Norway which appear to be their largest kindergarten clients: Laeringsverkstedet and Trygge Barnehager AS. SBB will likely realize significant revaluation gains over the past 2 years despite the discount to book, as these properties appeared to have been revalued upwards >50% immediately after acquisition.

We expect scrutiny from Norwegian regulators in a time where profiteering on social services and foreign ownership of state service facilities is under the magnifying glass.

[1] https://corporate.sbbnorden.se/en/sbb-sells-a-49-stake-in-its-social-infrastructure-portfolio-for-public-education-to-brookfield-for-sek-9-2-billion-in-cash-with-an-additional-earn-out-of-up-to-sek-1-2-billion-in-cash/#_ftn8

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